No BREXIT. Yes Digital- Q1FY17 Industry Performance Analysis

July 19, 2016
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Over the past few months, much has been written about the toxicity of the overall macro-economic environment on the Indian technology industry. What is a given though, is that uncertainty is the new normal. How then did the Indian IT companies fare in the last 3 months? While the results have just started to come in, here is a preliminary analysis-

Revenue Addition– For the companies that have declared their results so far, revenues have grown 3.1% sequential QoQ, and 9% YoY. Note that most of the companies who have declared, are coming off a slow FY16, and given that, the performance is positive. At the same time, there is divergence in growth, with strategy and execution the defining success factors.

Two big questions naturally follow up- BREXIT and Digital. As for the former, most companies agree that it is too early to see any impact. Today Indian IT gets 18% of its revenues from UK, and 12% from Continental Europe. Some analysts predict Continental Europe could be 3X UK in 3 years, while some argue otherwise. Either ways it is too early.

Clients are increasing spend on Digital. Even though these deals are small in size and are for shorter durations, hence smaller ticket sizes, it is expected that digital will drive increased spending going forward. According to HFS there is a consistent increase in the number of digital deals in the last six months; digital today is a part of 40% of the total deals signed.

Geographic Trends– Broad based growth seen across geographies. Growth in the US was as expected (11.7% YoY, and 2.6% QoQ). But at 3.1% QoQ, Europe was a positive surprise, as was India at 5.1% QoQ.

Vertical Trends– At 8.3% YoY and 2.4% QoQ, the BFSI continues to show steady growth. However, at 14.2% YoY, and 9.5% QoQ, the comeback vertical of the quarter has been the telecom sector. Retail, and travel were other high growth verticals.

Profitability– The first quarter is usually a stressful time for profits, as wage hikes and visa costs make maximum impact- as a result, this quarter saw sequential profits decline by 1.7%. But on a YoY level, notwithstanding currency fluctuations, profits actually increased by 5%

Headcount Addition– Headcount addition has seen a robust sequential growth of 2%, and annual growth of 10.5%, which outpaces revenue growth. This not only presents a clear indicator of the positivity in the demand scenario going forward, but also flags the exponential demand for digitally skilled talent. Additionally, increase in on-site hiring (commensurate with increase in onsite revenues), subcontracting, and automation are also impacting the status quo of existing hiring models.

Attrition– While attrition levels have come down from the highs of FY16 (down 1% YoY), it has increased by 0.5% on a sequential basis. This is a quarter though, that experiences maximum attrition as employees move out for higher studies. At the same time, higher attrition indicates more jobs in the market, which again points to better times in the future.

Utilization– Indian IT firms today are working to reduce bench strength as much as possible. Q1FY17 capacity utilization at 77.2% is highest since past 2 years.

Onsite Offshore Mix– As Indian IT companies move up the value chain it is evident that an India focused delivery model will not be adequate. Global resources and presence is required are required that will work in tandem with the India delivery model. That, coupled with protectionist stances in key markets have ensured that there is renewed focus to drive onsite businesses. Q1FY17 presented more evidence of this shift in mindset, and business focus, with onsite revenues growing by 1.4% over Q1FY16, and 0.2% sequentially.

Outlook

As market dynamics shift, the Indian IT industry increasingly is coming under the microscope. There is a fundamental change upon the Indian IT industry, encompassing technology, markets, go to business models, workforce and growth aspirations- the future is exciting indeed. The NASSCOM industry growth guidance for the year stands at 10-12%, and we believe the Indian IT-BPM industry is on track to achieve that.